Getting strangers to fund your dreams

posted Aug 7, 2014, 2:21 AM by Siamak Ebarhimi

ape Town - A British student who is asking strangers to fund her degree has been branded a “brat” for not raising the cash herself. But why shouldn’t she jump on the crowd funding bandwagon? News24 finds out more.

Dismissing online criticism that her campaign was a “shameful ploy for money”, Eastop reasoned that she couldn’t afford to take on more debt, and that the public will crowd fund all sorts of projects.CrowdFunding advertizing

She said: “We know that there's a willingness to help people. If the online community is prepared to fund a potato salad or a pizza museum, then why not a masters degree?”

Eastop is right - people are willing. So willing, that the World Bank estimates the market could grow to be worth $95bn by 2025.

Even South Africa’s oldest cinema, The Labia, has turned to crowd funding to raise the money it needs to go digital.

So how does it work, do people just give money away?

Not exactly. People pledge money towards an idea or project and are paid back with an “in-kind” reward which is produced by the project itself. The more money you pledge, the larger the reward.

For example, if you donate R100 to The Labia theatre, your name will appear on a special ‘Thank You’ screen for a year, while a R500 donation would secure you and a guest a pre-movie tour of the theatre with its owner Ludi Kraus, followed by movie tickets, drinks and popcorn.CrowdFunding marketing

Where did crowd funding come from?

Following the financial crisis of 2008, traditional banks put a lock down on lending money to riskier clients - small business, entrepreneurs and artisans.

These people started looking elsewhere for money, using the internet to extend their options beyond their friends and family.

Communities of people online began to pool money to fund people with good business ideas - and in less than a decade, crowdfunding has becoming an “exciting phenomenon”, according to the World Bank.

Since the US group Kickstarter launched in 2009, for example, 6.9 million people have pledged a total of $1.2bn towards projects. Kickstarter currently has more than 10 000 live projects worth $35m in pledges.Kickstarter Marketing

What kind of projects are successful?

Kickstarter, which is the world’s largest crowd funding website, has a 43% success rate.

But not all projects are equal - for example, the group’s statistics show that dance projects have the highest success rate at 70%, followed by theatre at 64% and music at 55%.

The least successful projects are fashion, with a 29% success rate, followed by technology at 32% and publishing, also at 32%.

Film projects are by far the most popular on Kickstarter, though their success rate is just below the average at 40%.

That said, one in five of the films accepted by the 2012 Sundance, Tribeca, and South by Southwest film festivals were funded on Kickstarter. Plus, six Kickstarter-funded films have been nominated for Academy Awards. One of them, Inocente, came away with an Oscar in 2013.

Patrick Schofield, co-founder of the South African crowd-funding group Thundafund, explained that universally, there are a couple of factors that ensure success: a strong community and an attractive reward.

He said: “Dance projects will often have 20 people on stage at one time - so that’s 20 people activating their networks - as opposed to just one person.”

Schofield also pointed out that the rewards are often more attractive for live performers and artisans, while peoples’ understanding and interest in tech projects is likely to be more limited.

In South Africa, Schofield said there was “massive scope” for activism and causes.Indiegogo Marketing

How do you know if your idea will work?

You don’t. But that’s why crowd funding is “a godsend for entrepreneurs,” according to Schofield.

He argues that by cutting out the middle man - the traditional bank lender - you are going straight to the audience to find out if they will pay for your product. That way, you know immediately whether you are on to a good idea or not. If you fail to raise the money, you have your answer.

Reid Hoffman, the founder of LinkedIn, recently said that in the same way that citizen journalists have shaken up old media, “citizen lenders may upend Old Banking”.

He blogged: “Crowdfunding relies on the wisdom of crowds to identify fund and unleash entrepreneurial innovation far more efficiently than the credit rules of banks can.”

Both Hoffman and Schofield see it as the democratisation of financing. As Schofield said: “You tell the banker: ‘Take that form back, I’ll chat to my friends’’.

But what’s in it for the ‘citizen lender’?

According to Schofield, South Africans are beginning to realise the potential power of crowd funding.

Though the average pledge on Thundafund is just R200, Schofield said it was starting to go up.

“We all want to get involved in interesting and cool stuff,” said Schofield. “This allows you to step through the stage door - literally get to know the artists.”

Citizen lenders get to be a part of something fun outside their day job, and they get the chance to build something in their community in the way they would like it. This benefits not just the lender but the project too - which has a ready-made audience.

For example, people can currently help establish Cape Town’s first Chocolate Cafe by supporting the Honest Chocolate team. “This way round by the time it is launched, people already know about it, they arrive for the launch, they tell everyone about it,” said Schofield.crowdfunding marketing

And what about fraud?

Despite the rapid expansion of crowd funding platforms, there has been “very little fraud”, according to the World Bank.

As Schofield points out, rather than having one banker on your back, you have a whole community of people supporting you, encouraging you and helping you deliver on what you have promised.

The Australian Small Scale Offerings Board (ASSOB) was founded in 2007 and has funded 176 companies to date - not a single case of fraud has been reported.

Crowdcube, the largest equity-based crowd funding platform in the UK, has funded 29 companies since it began in February 2011 - with no reported fraud.

Kickstarter however has suffered four cases of attempted fraud - though no donor money was lost.

One was a campaign to raise capital for a video game, which was shut down after the developer was unable to address the questions and accusations from the donors.crowdfunding websites